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The Monte Paschi announced bailout claims that retail investors will be protected from losses imposed by the bailin by compensating them for up to €100k (the financial services compensation scheme limit).

Some of the junior corporate debt is trading at 40 cents to the euro for Monte Paschi, and also below par for other banks. Does it mean that the Italian government guarantees repayment at par for corporate bonds bought by retail investors?

Since institutions will be scrambling to offload their bond portfolios, this seems like a great deal for a retail investor where one can make up to €60k for free. Seems too good to be true.

Can someone clarify some of the details behind the bailout?

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    Are you sure the €100k compensation you are referring to would apply to bondholders and not merely depositors' cash and securities? Do you have any sources to cite? – Chris W. Rea Dec 22 '16 at 15:37
  • A couple of places I read this: ft.com/content/915fc872-1662-39f7-9e16-a651986f01b5 theguardian.com/business/live/2016/dec/22/… (search for retail) To be fair the articles are not 100% clear on whether the bailing rules will apply to retail investors or not. But they've been in talks with Brussels about it, so I suspect they want to have an exemption. – SMeznaric Dec 22 '16 at 16:14
  • Here they say that officials have said retail investors will not take a hit under bailin rules: ft.com/content/a018e818-c831-11e6-9043-7e34c07b46ef – SMeznaric Dec 22 '16 at 16:16
  • @SMeznaric something completely different could happen tomorrow, or over the long weekend. This is what we call a gamble. – CQM Dec 22 '16 at 19:12
  • @SMeznaric hows that bet looking now? capital shortfall "bigger than expected", this story is far from over – CQM Dec 27 '16 at 20:57
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You'd be taking quite a big gamble. From the article you mentioned in comments:

A model for the compensation of retail bondholders could be what Italy did after it stepped in more than a year ago to help four small banks. Junior bondholders were automatically awarded 80 per cent of the value of their losses as long as they could prove they had low income or scant assets. Otherwise, they had to go through an arbitration process to show that they had been the victims of mis-selling — a more cumbersome path.

So if they follow the previous scheme, you would at most get 80% back - and as you'd be hard pushed to claim mis-selling if you bought right now, you'd have to be not very well-off to begin with, making this an even bigger risk.

And of course they might look at other things like how long you've owned the bond. Generally in bailouts people are quite keen to limit "moral hazard", i.e. the prospect of future bailouts encouraging people to take overly risky decisions.

  • Looks like there is more news on this: reuters.com/article/… Apparently tier two bonds will be converted at 100% of face value. – SMeznaric Dec 23 '16 at 10:34

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